The real cost of raising the minimum wage

Opinion: Paying people more is not as simple as it looks

Sunday’s New York Times magazine will feature an article called “Supersize My Wage” by economics reporter Annie Lowrey. She concludes, “Unlike any other form of wealth redistribution, raising the minimum wage is basically cost-free to Washington. If it won’t hurt the unemployment rate — as some research suggests — Washington figures, why not slip those fast-food joints the bill?”

Lowrey’s column is one in a long series by the Gray Lady advocating increasing the minimum wage. Over the past month, the paper has published columns by Princeton professor Paul Krugman and University of Massachusetts professor Arindrajit Dube, to mention just two, on the advantages of raising the hourly minimum wage from its current level of $7.25.

If raising the minimum wage were cost-free, why stop at $10 or $15 an hour? Why not go straight to $24 an hour, the average hourly wage? That might be considered fair, because no one would have to earn less than average.

The answer, of course, is because some people are displaced at any minimum wage. It is obvious to the general public that increasing the minimum wage to $24 an hour would displace workers. It is less obvious when amounts are smaller. But when the minimum wage is raised, employers hire higher-skilled people, or switch to different forms of technology, such as placing orders through touchscreens.

Lowrey begins her column by citing economic studies on the effects of raising the minimum wage on fast food restaurants in New Jersey and Pennsylvania in 1992. They concluded that raising the minimum wage had no effect, or a small positive effect, on employment. That is why Lowrey suggests slipping “those fast-food joints the bill.”

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The studies, published in 1994 and 2000 by University of California professor David Card and Princeton University professor Alan Krueger, later chairman of President Obama’s Council of Economic Advisers, compared New Jersey with neighboring Pennsylvania, which did not raise the minimum wage. [Read the studies here and here.]

But just because economic studies are published in leading academic journals does not mean that the conclusions are accurate. The studies had a number of problems. Card and Krueger do not include information on the portion of employment at minimum wage at any date in time. No information was given on whether the minimum law was binding, and to what extent, for this sample.

The studies did not include information by county, such as income, unemployment, teen unemployment, labor force, and labor force participation rates. Neither did it include changes in state taxes and franchise fees.

The regression statistics explain little variance, and practically none of the coefficients is significant. Card and Krueger infer that minimum-wage policy makes no difference. A more likely interpretation is that the equation excludes important variables.

Card and Krueger focus exclusively on fast-food establishments, but many other minimum-wage employment opportunities in the service industry, particularly the hospitality industry, are also likely affected.

Finding the effects of raising the minimum wage is challenging, because 97% of American workers now make above the minimum wage — not because it is the law, but because employers have to pay higher compensation packages to retain workers. That is one reason that some academic studies do not find major negative effects of minimum-wage increases.

Those who would be harmed by increasing the minimum wage are young people. Half of minimum-wage workers are under 25, and 24% are teens. This group’s unemployment rate is already higher than the 7.3% overall rate. The teen unemployment rate is 21%, and the African-American teen unemployment rate is 36%. The youth unemployment rate is 12%.

Despite the stream of rhetoric from the New York Times, it is the unemployment rates of these workers that would rise if the hourly minimum wage rose to $10 or $15.

About 1.8 million Americans aged 16 to 24 worked for minimum wage in 2012, and many more young Americans coveted those jobs. Many young people start successful careers with minimum-wage jobs without expecting that the job will become a lifetime career. Doug McMillon, who will take over as Walmart CEO next February, started out as a teen unloading trucks at a Walmart distribution center.

A November Gallup poll showed that 76% of Americans support raising the minimum wage. But practically everyone with a heart is in favor of raising wages, as long as those higher wages are paid by someone else.

People might respond to pollsters saying that they are in favor of raising the minimum wage, but they are rarely willing to pay $13.90, or $20.00 for a service for which they pay only $10.00 today. They would not buy as much of the service if the price increased.

That is why raising the minimum wage is not cost-free to Washington. More low-skill Americans would be out of work. People would buy less of the higher-priced services. Supersizing a wage is not as simple as supersizing a hamburger.

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